PUB doubts Hydro's business model

This week, the Public Utilities Board ordered Manitoba Hydro to increase electricity rates by five per cent. In these days of skyrocketing energy prices, a story like this might appear as little more than a sign of the times. But there's much more to this rate hike.

Hydro was only seeking a 2.9-per-cent hike. The PUB took it upon itself to order the utility to raise rates by nearly twice that amount.

It might seem like this came out of left field, but regular observers of the PUB process saw this coming from way off. Over the past four years, the PUB has become increasingly uneasy about Hydro's massive capital expansion plans, which include two generating stations, a new transmission line and a new downtown office tower. In particular, the PUB is skeptical about whether Hydro's core business model -- which requires the expansion of generation to increase export sales and, ultimately, underwrite the cost of domestic electricity -- is going to work.

How skeptical?

"The Board expresses concern, not to be confused with opposition, with the unprecedented capital expenditure levels," the board wrote in its decision, "and questions whether the export revenue stream from new generation and transmission projects will be sufficient to cover the financial obligations related to these works, given the inherent risks that are present and lie ahead."

The PUB estimates Hydro has amassed plans to spend more than $18 billion on these and other capital projects over the next 15 years. If that's accurate, it marks a significant increase from previous estimates. Given current economic conditions, that's bad news for the NDP government.

Rapidly rising construction costs are driving up the cost of capital projects, while a more robust Canadian dollar drives down profits from export sales to the United States. All that represents very real political peril for Premier Gary Doer.

Doer has always relied heavily on Hydro, both as a tool for economic development (cheap electricity) and an engine of economic growth (capital expenditures). And for the most part, these two economic tools have served Doer well. The cheap electricity hasn't drawn thousands of new jobs to Manitoba, but it has probably saved many jobs from leaving. It certainly has provided stability for companies doing business here, which is a powerfully attractive commodity.

On the capital side, the economic activity from Hydro's expenditures on its dams and the major transmission line will help to insulate Manitoba to an extent from the volatile economic forces ravaging economies around us. It may not stop Manitoba from joining the slide into a continental recession, but it may support government revenues if other sectors of the economy begin to lag.

All that appeals to voters, but voters are also ratepayers. And those ratepayers are now beginning to see the cost of that economic development strategy.

Homeowners will see electricity costs increase between $36 and $72 per year as a result of this most recent PUB decision. However, there could be another rate increase in April 2009 if the PUB remains skeptical about the economic benefits of the capital projects.

Capital expansion at Hydro was not supposed to increase rates, of course. In fact, the PUB order runs completely contrary to the pledges made by the NDP when the largest of those capital projects, the Wuskwatim dam, was being sold to Manitobans. Increased export revenues were to be our ace in the hole, our assurance domestic electricity rates would remain low.

Back in 2003, when Wuskwatim was first proposed, critics suggested that if export revenues sagged, projects like this would end up being more of a burden than a benefit. Former Energy Minister Tim Sale brushed aside those concerns as the rantings of misinformed naysayers. "It's very simple," Sale said. "If we don't build Wuskwatim, our rates will definitely rise."

The fact that these predictions have come back to haunt Hydro and the province is unlikely to cause much anxiety in the utility's new downtown headquarters, or in the premier's office. Through thick and thin, wet and dry, Hydro and its political masters have remained resolute that if they produce the electricity, there will be somewhere to sell it at a comfortable profit.

Hydro believes the now robust Canadian dollar will weaken over the next several years, and settle back down to somewhere around 91 cents against the US dollar. This would restore Hydro's profit margin and once again make capital expansion seem reasonable.

But is that enough to restore confidence in the Hydro business model? The PUB, which holds the legal authority to raise and lower rates, is not convinced. And until it is convinced, higher rates are likely in the cards.

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